Record levels of smaller businesses sought external financial support in 2020

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Published today, the British Business Bank’s Small Business Finance Markets 2020/21 report highlights a surge in applications for external financial support, including government and local grants, among small and medium sized businesses (SMEs).

Almost half (45 per cent) of all SMEs surveyed said they applied for external financial support in 2020, compared to 13 per cent in 2019. At the same time, gross bank lending (excluding overdrafts) to smaller businesses rose to £104 billion in 2020, 82 per cent higher than in 2019, driven by use of the government loan schemes.

The report suggests there could be significant further demand for funding throughout 2021 as businesses seek to move on from the pandemic towards growth, adapt to life outside the EU, improve productivity and transition to a new net zero economy.

Catherine Lewis La Torre, CEO of British Business Bank, said: “This has been an especially challenging period for smaller businesses with external finance playing a vital role in business survival in the face of the Covid-19 pandemic. The British Business Bank has played an important role during the crisis and we will continue to support smaller businesses as they steer a path towards a sustainable recovery.”

Businesses shifted away from traditional forms of external finance to use government-backed finance schemes and support.

The use of bank overdrafts, credit cards and asset finance all fell, while the only increase in the use of traditional repayable external finance was seen in loans, up from around 10 per cent in previous years to 25 per cent in 2020. This is reflected in BBLS (Bounce Back Loan Schemes) and CBILS (Coronavirus Business Interruption Loans) lending data, which showed around 1.5 million facilities approved by the end of 2020. The use of government grant funding by businesses also increased significantly, from two per cent in 2019, to 31 per cent in 2020.

The report shows that nine in ten businesses seeking external financial support in the past year did so because of the impact of Covid-19, with three quarters of these SMEs seeking external financial support to help with cashflow. Encouragingly eight per cent sought finance, at least in part, to pivot or change their business model and seven per cent to invest in the digital capability of their business.

The majority of sectors saw between 20 per cent and 30 per cent of their SME population take up a loan during the pandemic, and British Business Bank data shows that across both BBLS and CBILS, the majority (59 per cent) of SMEs accessing government-backed finance schemes have borrowed more than 20 per cent of their reported turnover

Turnover decline rates for businesses of all sizes were over three times their respective prior five-year average, illustrating the scale of disruption across all businesses. The smallest SMEs have experienced the largest declines in turnover. In Q3, 49 per cent of zero employee firms reported a fall in turnover over the previous 12 months compared to 38 per cent of businesses with 50-249 employees.

Additionally, a significant proportion of finance facilities taken out because of Covid-19 remained unspent by Q3 2020. Only 23 per cent of SMEs had spent all of their facilities, and 19 per cent reported they had not spent any.

A continued reduction in operating expenses combined with significant government financial support and precautionary saving led to a 20 per cent rise in deposit holdings since the start of the year to a record £252 billion according to UK Finance data.

The report finds that record cash balances on the one hand and increasing debt levels on the other indicate that there are both a sizeable number of smaller businesses in a position to borrow further in 2021 and a sizeable number likely to struggle with debt repayments. High levels of debt, and in particular the number of businesses with higher debt to turnover ratios, suggests a potential drag on viable applications for finance in 2021.

In the final quarter of 2020, more than a third of smaller businesses expected to stay the same size over the next 12 months, 33 per cent expected to shrink, and only four per cent to sell or close. Only one in five (21 per cent) were expecting to grow, compared to 28 per cent the previous year. Small (10-49 employees) and medium (50-249 employees) sized businesses were most likely to expect to grow. SMEs in business services (25 per cent) and production (23 per cent) sectors were most optimistic about their prospects for growth over the next year, with businesses in construction and other services sectors least optimistic (both 17 per cent).

The report suggests there could be significant further demand for funding in 2021, as businesses continue to recover from the effects of the pandemic. There are positive indicators that banks currently look to have sufficient capital and could support further lending. Due to the dominance of government emergency schemes, non-bank and alternative finance lenders have been less active in 2020 and seen lower demand for their products. The previous five years to 2020 saw significant growth in alternative finance flows to smaller businesses, and these lenders expect activity to resume when demand returns.

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The British Business Bank’s Start Up Loans programme saw successful applicants reaching a peak in June 2020, and a record £126 million of funding drawn down in 2020, the highest since the scheme began, and up 41 per cent from 2019.

The Bank also has a wide range of interventions aimed at supporting venture and growth capital. This type of finance is vitally important to high-growth firms which have the potential to provide jobs and economic growth. British Patient Capital, aimed at this area of the market, has capacity to deploy an additional £1.5bn to support investment in these types of businesses.

Working with government, the Bank has also developed the Recovery Loan Scheme to ensure businesses of any size can continue to access loans and other kinds of finance up to £10 million per business once the existing Covid-19 loan schemes close, providing support as businesses recover and grow following the disruption of the pandemic and the end of the transition period.